Dell Dips Its Pen in the Inkwell

TRUE TO HIS WORD, Michael Dell finally unveiled his
Dell
-branded line of printers and ink cartridges last week. Since formally announcing his intentions to enter the printer business -- much to the irritation of rival
Hewlett-Packard
-- about six months ago, there has been a lot of idle speculation about the rollout but not a whole lot of facts.

What we now know is that Dell is dipping one toe in the water with the introduction of four machines: a lower end ink-jet "all-in-one" priced at $139 (not including a limited-time $30 rebate), two laser printers ($289 and $499) and a networked version of the latter selling for $839. The first three models mentioned are aimed at the consumer and home office markets while the fourth is geared toward small business customers.

While
Lexmark
products are priced only slightly higher than Dell's, HP's lower-end all-in-one machine could run as much as $60 more than Dell's comparable model (rebates not included). But HP is expected to command higher prices because it is the leading brand with a reputation for quality. Also, shipping costs can range anywhere from zero to $90 for a Dell order.

The early consensus among Dell-watchers is that the prices are not so low that they would disrupt the market for other makers of printers, including HP, Epson,
Canon
and Lexmark, which is manufacturing the machines for Dell. In other words, Dell is predictably coming in at prices lower than already out there but not so radically cheaper that Dell would grab big chunks of market share out of the gate.

Some brokerage analysts, such as Andy Neff of Bear Stearns, characterized Dell's hardware pricing as "aggressive" and potentially menacing to HP. But others, such as Sanford Bernstein's Toni Sacconaghi, were less alarmed. Sacconaghi deemed the new Dell products and their pricing as "modestly positive" for Lexmark and having "negligible impact" on HP in the near term.

The Bernstein analyst was mildly surprised that Dell's hardware and ink cartridge prices were "essentially in line with Lexmark's," particularly on the cartridge side of the equation. There was some fear on the Street that Dell was really going to undercut cartridge prices, which is where manufacturers like Lexmark and HP make their money.

Goldman Sachs analyst Laura Conigliaro concurred with Sacconaghi, saying Dell's modestly lower prices for both hardware and ink would make a "dramatic competitive response by HP and Lexmark unlikely." Conigliaro notes that Dell's move into branded printers demonstrates, yet again, the company's ability to expand into new markets that will grow the top line and eventually add to the bottom line during the next few years.

Needham & Co. analyst Charles Wolf predicts that Dell's entry in to printers will prove more troubling to HP, which relies on printing and imaging for roughly 80% of its profits, than the Palo Alto tech titan is willing to acknowledge. Wolf points out that Dell naysayers have been concerned that customers will not adapt to ordering ink and toner directly over the Internet. To address that dilemma, Dell built in software that gives users advance notice that machines are running low on ink.

Most analysts seem to agree with Wolf that buying ink cartridges directly from Dell will not prove to be that daunting, especially because Dell recognizes that its growth customers are small businesses that are willing to buy in bulk directly from the seller in exchange for greater savings.

But what about performance? One can presume that the Dell and Lexmark machines are pretty comparable considering that Lexmark is helping make them for Dell. But there is a recognizable trade-off between HP and Dell machines, says Walter Mossberg, personal technology columnist for The Wall Street Journal, our sister publication. When it comes to the lower-end all-in-one ink jets, Mossberg says, if you care more about print quality, then HP might be the better choice. That is, as long as you are willing to pay more, deal with more complexity and don't need to scan documents into text that can be edited easily.

Dell is the preferred machine if you want to pay less, have more speed, easier controls and excellent scanning in exchange for lower-quality imaging, the columnist wrote.

The gloves are off, and Dell has thrown the first punch. But Sanford Bernstein's Sacconaghi predicts it could be a long, drawn out fight before Dell lands any heavy blows. He predicts that Dell might capture 1.5% of the all-in-one ink-jet market this year and as much as 3% in 2004.

As for higher-end lasers, Sacconaghi foresees maybe 2% of the market by 2004. But over time, he says, Dell should continue to add new models, build up its installed base and increase its share of the lucrative ink-cartridge profit pool that is the lifeblood of HP. At least, that's the plan.

High Five for Wi-Fi

One of the things we like about the research from Ramberg Whalen in New Hampshire is the legwork behind it. In particular, for a shop that specializes in watching the semiconductor business and capital equipment makers, they really like to study the retail channel. After all, that is where the products that use chips ultimately end up.

That's why we were interested to hear that analyst Chris Whalen is a fan of
Cisco Systems
' planned $500 million buyout of Linksys Systems, a maker of Wi-Fi wireless networking technology. Whalen says that he recently visited more than 30 retail outlets along the East Coast, ranging from warehouse discounters to big-box office superstores to electronics and computer specialty stores -- and his take-away from this register watching is that Linksys is one, hot retail brand. Whalen says store clerks consider Linksys the favored Wi-Fi kit over those made by D-Link, Belkin,
Microsoft
and Netgear, in that order.

"I think that everyone realizes that Wi-Fi is going to be the next thing," Whalen says. And Cisco is smart to enter the consumer end of the market, where it can shape the home office and small business market without jeopardizing its core enterprise networking business, he says.

"Remember, we are talking about a company that needs to protect the highest margins in the industry," Whalen says.

Through the acquisition of Linksys, Cisco can participate in the highly competitive lower-margin part of the Wi-Fi wave without damaging its franchise, he argues.

In particular, Cisco will be a major player in voice-over-Internet protocol, which allows people to speak over the Internet using various devices. Whalen speculates that Cisco, which has developed a handset for voice-over-the Internet, could eventually offer a lower-end handset and other products under the Linksys brand.

Linksys Chief Executive Victor Tsao told Barron's that Cisco intends to run the business separately under the Linksys label, perhaps eventually branding products with something like "Linksys by Cisco." But that is merely an option being discussed.

"The funny thing is that the Linksys brand at the retail level is just as strong as the Cisco brand at the enterprise level," Whalen argues.

At any rate, Cisco estimates that the small and home office networking market could grow to be as large as $7.5 billion in 2006, Whalen says. And through the Linksys brand, Cisco will be able to participate in that market without hurting its core franchise.

What's more, it is probably only a matter of time before Dell starts offering its own Wi-Fi gear, and Cisco needs to form a beachhead at the lower end of the corporate market before it's too late, he predicts. "I think the model for both consumer and corporate users is Wi-Fi everywhere," Whalen says. "We're pretty impressed with this move by Cisco."

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